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Economics and Financial Markets

October 2019

07/10/2019

Giovanni Leonardo

Head of Investment Wealth Management Switzerland

Norbert Brestel

Head of Investment Solutions

Slowing global growth, but no recession

The global economy continues to tread water, but we do not anticipate a recession in the next 12 months. We maintain a neutral position for equities, and our preference is for US, Asia and the emerging markets. Although equities are highly valued, they continue to be more attractive than bonds. We are cautious with bond investments. the current policy of low interest rates is causing a massive mispricing of bonds. We are therefore keeping the duration short and the credit quality of the portfolios high.

The trade dispute raging between the USA and China and rising geopolitical tensions are holding back global growth to an ever greater extent. Our economists have again reduced their growth forecasts for the current year and next year. But they do not anticipate a reces-sion over the next 12 months.

As we mentioned in earlier publications, there can be no winners in a trade war, only losers. Even more important is the fact that we observers are among the losers. The downturn in the purchasing managers index (PMI) to lows last seen in 2012 makes this particularly clear. This decline can be observed not only in China, but also in countries that are passive onlookers to the trade dis-pute, such as Japan, Germany and the UK. Countries in which the industrial sector makes up a large share of the gross domestic product (GDP) (such as China with about 30% and other emerging countries) are particularly ex-posed. Countries such as the USA, where the services in-dustry carries greater weight, are less exposed. But as soon as consumer sentiment starts to deteriorate in these countries, they will also be affected. I think that the two parties involved in this trade dispute should come to their senses immediately, as both are starting to feel the consequences of their actions. But it is diffi-cult to say how long this could go on.

Central banks have shown that they are aware of the current global problems of a slowing economy and low inflation, as they have reversed the more restrictive monetary course they had been following recently to be-come more expansive again. Experts are raising more and more questions about the effect on the real econ-omy of this ultra-loose monetary policy, and the central banks themselves confirm that the economic situation will not be mitigated without fiscal measures. Neverthe-less, the Fed raised its federal funds rate last year, thereby creating some ammunition to combat any shocks to the economy. In Europe, the normalisation ended before it even began. If a recession comes, Eu-rope would therefore not have much room to manoeu-vre.

We are maintaining a neutral position in equities in our investment strategy. Our preference is for the USA, Asia and the emerging countries. We are aware that stocks are not cheap. But compared to other investments and in light of the attractive dividend yields, equities remain a key component of a balanced portfolio. The neutral po-sition is explained by the fact that, despite the deterio-rating outlook, we cannot and should not exclude the impossible happening. And that would be… the next tweet announcing a new trade agreement between the USA and China. Such a deal would abruptly change the global growth outlook. In this case, all economists would have to revise their estimates upward.

Low interest rate policies are leading to a major mispric-ing of credit. Risk premiums are at historical lows and in-vestors have increasingly lower quality in their portfo-lios. We have a conservative position with regard to in-terest rates and credit, and we continue to prefer quality instruments, while maintaining a short duration and holding a high level of liquidity. The liquidity allows us to take advantage of any distortions in the market.

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Author

Giovanni Leonardo

Head of Investment Wealth Management Switzerland

Norbert Brestel

Head of Investment Solutions

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